Verizon in DSL deal with NorthPoint

Deal to merge Verizon's DSL business with NorthPoint worth $800m, but telco's second quarter results are below Wall Street expectations

Verizon Communications, which is entering the third day of a strike by 85,000 union members, announced an $800m deal to merge its digital subscriber line business with NorthPoint.

The telco formed through the merger of Bell Atlantic and GTE also announced second quarter results, boosting profits, but falling below Wall Street expectations.

Verizon's deal with NorthPoint calls for the firms to merge their DSL networks, products, technology, strategic partnerships and management under a "new" NorthPoint, of which Verizon will own 55 percent. NorthPoint chief executive Liz Fetter will continue in her position, but managers will be brought over from Verizon.

NorthPoint will get Verizon's existing DSL business and an $800m cash investment by Verizon, $450m on which will be used to fund the new NorthPoint's capital expenditures and operations. The rest will be paid out to NorthPoint shareholders, with each share receiving around $2.50.

Each share of NorthPoint will be exchanged for one share of the new company as of the closing date.

Verizon said the NorthPoint deal coupled with its recent acquisition of OnePoint will hit earnings in future periods. In 2001, Verizon said its current earnings growth target of 9.5-11.5 percent will be cut to the five to six percent range. The company will also take charges of $2bn through 2003.

The NorthPoint partnership could go a long way toward smoothing out Verizon's DSL problems.

Last quarter, Bell Atlantic, which later became Verizon, said glitches, customer service and other internal problems caused it to miss its DSL subscriber projections.

Verizon said its second quarter digital subscriber line customer count increased about 47 percent from the end of the first quarter to 220,000. The number of NorthPoint DSL subscribers grew 50 percent in the second quarter to 62,000 subscribers from 41,300 subscribers as of 31 March.

NorthPoint could have shown better growth if it didn't have to coordinate with Verizon, which often has to send technicians to prep local lines before NorthPoint installs service.

NorthPoint technicians interviewed by ZDII have griped that working with Verizon and coordinating customer appointments has been their biggest hassles.

That attitude could also bring up cultural issues. Can an upstart such as NorthPoint get along with its historically slow-moving partner?

The combined NorthPoint-Verizon DSL venture will have 600,000 subscribers, more than 3,000 central offices and 63 million homes passed, the companies said.

NorthPoint reported second quarter sales of $24.4m, up 22 percent from first quarter sales of $20m in the first quarter.

Because of its network expansion and new service and support upgrades, NorthPoint reported a loss of $112.1m versus a net loss of $79.9m in the first quarter.

On a per share basis, NorthPoint reported a loss of 85 cents a share, in line with estimates.

Verizon reported combined net income for the quarter of $4.9bn, or $1.79 per share, compared to $1.9bn, or 70 cents per share, in the second quarter of 1999. Adjusting for one-time events and excluding the results of Genuity and a gain from pension settlements, combined results were 72 cents per share, compared to 67 cents in the second quarter of 1999.

First Call consensus for the quarter was for an 83 cents per share profit.

Revenue for the quarter was $16.6bn, up 7.4 percent the year-ago quarter. The figure includes revenue from Vodafone AirTouch (quote: VOD) and PrimeCo Personal Communications properties in both periods, and excludes revenues from Genuity. The Genuity business was sold as a condition of the merger, though Verizon maintains a 9.5 percent stake in the firm.

Wireless customers increased 22 percent from the year-ago quarter to 25.6m. Revenues were $4.0bn, up 19 percent from $3.3bn in the second quarter of 1999.

Verizon's Information Services group generated $1.1bn in revenues in the second quarter, unchanged from a year ago, although operating income for that segment rose $32m to $561m.

During the second quarter, Verizon saw data revenue of nearly $1.5bn, up almost 32 percent compared to a year ago. Data sales of high-bandwidth packet-switched and special access services, and network integration services, accounted for almost 70 percent of the telecom segment's revenue growth for the quarter.

The company also reset its financial goals. Verizon said it adjusted its 2000 earnings target to $2.90-$2.94 with 2001 EPS growth in the 9.5-11.5 percent range, and twelve percent-plus in 2002. The projections do not include merger charges or results from Genuity.

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